Vertical Integration and Internationalization Strategies of Russian Oil Companies
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INTRODUCTION ..............................................................................................................................6
Chapter 1. INTERNATIONALIZATION OF OIL COMPANIES ............................................10
1.1 Theoretical approach to Internationalization ............................................................................10
1.1.1 Resource-based view theory on the Internationalization process of oil companies .......16
1.1.2 Internationalization trends of Russian Oil companies....................................................17
Chapter 2. VERTICAL INTEGRATION OF OIL COMPANIES..............................................21
2.1 Vertical Integration and Value Chain in Oil industry...............................................................21
2.2 Downstream sector: logistical aspect in transportation of Oil and Oil products ......................25
2.3 Factors affecting the choice of vertical integration strategy.....................................................26
2.4 Research gap .............................................................................................................................28
Chapter 3. METHODOLOGY ........................................................................................................30
3.1 Description of methodological research process. Methods of study ........................................30
3.2 Case selection............................................................................................................................33
3.4 Data Collection .........................................................................................................................33
3.5 Time horizons ...........................................................................................................................36
3.6 Evaluation criteria and validity.................................................................................................37
3.7 Limitations of study ..................................................................................................................37
Chapter 4. CASE STUDY................................................................................................................39
4.1 Case of Gazprom Neft ..............................................................................................................39
4.2 Case of Lukoil...........................................................................................................................42
4.3 Interview analysis .....................................................................................................................44
4.4 Application of logistical and supply chain factors in case analysis of Gazprom Neft .............52
4.5 Application of logistical and supply chain factors in case analysis of Lukoil..........................53
CHAPTER 5. CONCLUSIONS AND IMPLICATIONS..............................................................55
5.1 Conclusions...............................................................................................................................55
5.2 Theoretical contribution............................................................................................................56
5.3 Managerial Implications ...........................................................................................................57
5.4 Recommendation for future research and limitations...............................................................58
REFERENCE LIST..........................................................................................................................59
APPENDIX........................................................................................................................................63
Chapter 1. INTERNATIONALIZATION OF OIL COMPANIES ............................................10
1.1 Theoretical approach to Internationalization ............................................................................10
1.1.1 Resource-based view theory on the Internationalization process of oil companies .......16
1.1.2 Internationalization trends of Russian Oil companies....................................................17
Chapter 2. VERTICAL INTEGRATION OF OIL COMPANIES..............................................21
2.1 Vertical Integration and Value Chain in Oil industry...............................................................21
2.2 Downstream sector: logistical aspect in transportation of Oil and Oil products ......................25
2.3 Factors affecting the choice of vertical integration strategy.....................................................26
2.4 Research gap .............................................................................................................................28
Chapter 3. METHODOLOGY ........................................................................................................30
3.1 Description of methodological research process. Methods of study ........................................30
3.2 Case selection............................................................................................................................33
3.4 Data Collection .........................................................................................................................33
3.5 Time horizons ...........................................................................................................................36
3.6 Evaluation criteria and validity.................................................................................................37
3.7 Limitations of study ..................................................................................................................37
Chapter 4. CASE STUDY................................................................................................................39
4.1 Case of Gazprom Neft ..............................................................................................................39
4.2 Case of Lukoil...........................................................................................................................42
4.3 Interview analysis .....................................................................................................................44
4.4 Application of logistical and supply chain factors in case analysis of Gazprom Neft .............52
4.5 Application of logistical and supply chain factors in case analysis of Lukoil..........................53
CHAPTER 5. CONCLUSIONS AND IMPLICATIONS..............................................................55
5.1 Conclusions...............................................................................................................................55
5.2 Theoretical contribution............................................................................................................56
5.3 Managerial Implications ...........................................................................................................57
5.4 Recommendation for future research and limitations...............................................................58
REFERENCE LIST..........................................................................................................................59
APPENDIX........................................................................................................................................63
Background
In recent years various changes happened in different industries worldwide. The quick
improvement of technology and its accessibility led to rapid increase of transformations. The share of
oil in world energy has a direct correlation with the world economic growth. The strategic significance
of the oil and the growth of its consumption has lead to the embellishment of the petroleum industry.
Variety of new factors arises across industries and changes the internationalization and vertical
integration strategies and their implementation while managing the business.
Oil industry is one of the most complex industries engaged in exploration, production,
transportation and processing of oil and oil products. The role of the industry in terms of scientific
and technological revolution is constantly increasing due to the development of transportation and
district heating production, causing the rapid growth of energy consumption. The largest oil reserves
(65%) are concentrated in the Middle East region, the main players on the market are: Saudi Arabia,
Russia, United States, Iran, Mexico, China. Russia owns a large reserve of oil and development of oil
industry and has traditionally been one of the largest exporters of raw materials on the world market.
At the same time the oil industry is a major component of socio-economic development of Russia
with the diversity of linkages with other sectors of the economy. Oil industry is one of the most
important sources of income for Russia. According to the International Monetary Fund Statistics on
2015, export of crude oil reached 10% of total GDP.
The paper examines the process of internationalization of Russian Oil companies (case of
Gazprom Neft and Lukoil). Russia has become a very important player in the market on a world scale.
The strategic consideration of internationalization and vertical integration are considered in this
research paper. Internationalization gives companies new possibilities for the development around the
world and creates additional value. Through internationalization company can develop world level
capabilities and can increase capitalization and gain a deeper control over all the processes of the value
chain, which in Oil industry are: exploration, production and sales. Research on the
internationalization process of Russian Oil companies has been increasingly performed in the last
decades, this particular paper examines the internationalization process of Russian Oil companies with
focus on the logistical and supply chain factors which influence the decision-making process of
internationalization and vertical integration of Russian oil companies.
7
Research problem
In order to state the relevant research problem the literature review was conducted to evaluate
the process of Internationalization and vertical integration. The present paper offers common sense
bits of knowledge about the justification and factors which influence the process of
Internationalization and vertical integration of the Oil companies.
After the literature review was conducted, we identified that inspite of the colossal literature on
internationalization and vertical integration processes and factors which influence them, much less is
known about the supply chain and logistical factors influencing the choice of location or country for
potential internationalization and vertical integration.
Therefore, we are going to concentrate on outward operations so as to investigate the
internationalization procedure of Oil organizations in the downstream division and to identify the
main logistical and supply chain factors that influence the decision-making process for
internationalization and vertical integration strategies.
Purpose of the study
This paper aims to fill this research gap through an in-depth case study of two companies
Gazprom Neft and Lukoil, via the primary data obtained through in-depth interviews with experts of
industry (Baker Hughes) and managers who represent companies (Gazprom Neft and Lukoil) and
analysis of secondary data obtained from annual reports and data books. The cases were selected,
taking into account the following criteria: originated in Russia, but operating overseas, vertically
integrated, has refinery or production or distribution projects abroad, should represent both private
and governmental companies.
The goal of the study is to identify the main main logistics and supply chain factors that
influence the choice of the potential market for internationalization and vertical integration.
The objectives of this study are:
• to display the peculiarities of internationalization process of Russian oil companies and to
understand which are the main logistics and supply chain factors that influence the process of
internationalization, to analyse the importance of this factors while Russian Oil companies
choose a market and strategy for internationalization.
• to formulate managerial implications for the companies operating in this industry
8
• to create a theoretical base for the future researchers of supply chain and logistical factors
influencing the decision-making process of Russian Oil companies.
Research questions
In order to reach the objectives, the following research question was formulated:
1. What logistical and supply chain factors influence the decision-making process while
Russian oil companies choose the strategies for internationalization and vertical
integration?
The research gap can be filled by answering research question through the conduction of
qualitative research, method of case study. The principal advantage of this type of research is that it
is flexible and adaptable to change, without losing the direction of the enquiry (Matthews & Ross,
2010). A case study is an empirical inquiry that analyses a сurrent situation within its real-life context.
Case study relies on a huge amount of sources of evidence. The main focus is upon the details of the
situation, the reality behind these details, the subjective meanings and motivating actions (Saunders,
2009). The study generally focuses on the analysis of 2 Russian Oil companies: Gazprom Neft and
Lukoil, both companies correspond to the main criteria, which are: Russian company, operating
abroad, have a vertical integration degree, has refining and production activities abroad.
Structure of the study
This research paper consists of 4 chapters, four main parts. The first chapter is devoted to the
literature review of the concept of internationalization process of oil companies, with focus on trend
of Russian Oil companies and main peculiarities. The second chapter analyses the information about
the phenomenon of the vertical integration of Russian Oil companies. The third part describes the
methods which are used in this research paper and the justification of used tools presented there. The
main research tool is case study complemented by in-depth interviews of experts in order to gain
primary data and analysis of documents to obtain secondary data. The fourth chapter contains withincase analysis of the case companies: Gazprom Neft and Lukoil, generalization and analysis of the
interviews, conclusions. The fifth chapter contains conclusions of the research paper, managerial
implications and suggestions for future researchers. This master thesis will be relevant in terms of
practical and theoretical application to analysis of feasibility of the internationalization process of
9
Russian oil companies with focus on supply chain and logistical factors which influence the decisionmaking process about future internationalization. This thesis will provide companies with practical
analysis and future researchers with the theoretical contribution for the potential expansion of the
theory.
In recent years various changes happened in different industries worldwide. The quick
improvement of technology and its accessibility led to rapid increase of transformations. The share of
oil in world energy has a direct correlation with the world economic growth. The strategic significance
of the oil and the growth of its consumption has lead to the embellishment of the petroleum industry.
Variety of new factors arises across industries and changes the internationalization and vertical
integration strategies and their implementation while managing the business.
Oil industry is one of the most complex industries engaged in exploration, production,
transportation and processing of oil and oil products. The role of the industry in terms of scientific
and technological revolution is constantly increasing due to the development of transportation and
district heating production, causing the rapid growth of energy consumption. The largest oil reserves
(65%) are concentrated in the Middle East region, the main players on the market are: Saudi Arabia,
Russia, United States, Iran, Mexico, China. Russia owns a large reserve of oil and development of oil
industry and has traditionally been one of the largest exporters of raw materials on the world market.
At the same time the oil industry is a major component of socio-economic development of Russia
with the diversity of linkages with other sectors of the economy. Oil industry is one of the most
important sources of income for Russia. According to the International Monetary Fund Statistics on
2015, export of crude oil reached 10% of total GDP.
The paper examines the process of internationalization of Russian Oil companies (case of
Gazprom Neft and Lukoil). Russia has become a very important player in the market on a world scale.
The strategic consideration of internationalization and vertical integration are considered in this
research paper. Internationalization gives companies new possibilities for the development around the
world and creates additional value. Through internationalization company can develop world level
capabilities and can increase capitalization and gain a deeper control over all the processes of the value
chain, which in Oil industry are: exploration, production and sales. Research on the
internationalization process of Russian Oil companies has been increasingly performed in the last
decades, this particular paper examines the internationalization process of Russian Oil companies with
focus on the logistical and supply chain factors which influence the decision-making process of
internationalization and vertical integration of Russian oil companies.
7
Research problem
In order to state the relevant research problem the literature review was conducted to evaluate
the process of Internationalization and vertical integration. The present paper offers common sense
bits of knowledge about the justification and factors which influence the process of
Internationalization and vertical integration of the Oil companies.
After the literature review was conducted, we identified that inspite of the colossal literature on
internationalization and vertical integration processes and factors which influence them, much less is
known about the supply chain and logistical factors influencing the choice of location or country for
potential internationalization and vertical integration.
Therefore, we are going to concentrate on outward operations so as to investigate the
internationalization procedure of Oil organizations in the downstream division and to identify the
main logistical and supply chain factors that influence the decision-making process for
internationalization and vertical integration strategies.
Purpose of the study
This paper aims to fill this research gap through an in-depth case study of two companies
Gazprom Neft and Lukoil, via the primary data obtained through in-depth interviews with experts of
industry (Baker Hughes) and managers who represent companies (Gazprom Neft and Lukoil) and
analysis of secondary data obtained from annual reports and data books. The cases were selected,
taking into account the following criteria: originated in Russia, but operating overseas, vertically
integrated, has refinery or production or distribution projects abroad, should represent both private
and governmental companies.
The goal of the study is to identify the main main logistics and supply chain factors that
influence the choice of the potential market for internationalization and vertical integration.
The objectives of this study are:
• to display the peculiarities of internationalization process of Russian oil companies and to
understand which are the main logistics and supply chain factors that influence the process of
internationalization, to analyse the importance of this factors while Russian Oil companies
choose a market and strategy for internationalization.
• to formulate managerial implications for the companies operating in this industry
8
• to create a theoretical base for the future researchers of supply chain and logistical factors
influencing the decision-making process of Russian Oil companies.
Research questions
In order to reach the objectives, the following research question was formulated:
1. What logistical and supply chain factors influence the decision-making process while
Russian oil companies choose the strategies for internationalization and vertical
integration?
The research gap can be filled by answering research question through the conduction of
qualitative research, method of case study. The principal advantage of this type of research is that it
is flexible and adaptable to change, without losing the direction of the enquiry (Matthews & Ross,
2010). A case study is an empirical inquiry that analyses a сurrent situation within its real-life context.
Case study relies on a huge amount of sources of evidence. The main focus is upon the details of the
situation, the reality behind these details, the subjective meanings and motivating actions (Saunders,
2009). The study generally focuses on the analysis of 2 Russian Oil companies: Gazprom Neft and
Lukoil, both companies correspond to the main criteria, which are: Russian company, operating
abroad, have a vertical integration degree, has refining and production activities abroad.
Structure of the study
This research paper consists of 4 chapters, four main parts. The first chapter is devoted to the
literature review of the concept of internationalization process of oil companies, with focus on trend
of Russian Oil companies and main peculiarities. The second chapter analyses the information about
the phenomenon of the vertical integration of Russian Oil companies. The third part describes the
methods which are used in this research paper and the justification of used tools presented there. The
main research tool is case study complemented by in-depth interviews of experts in order to gain
primary data and analysis of documents to obtain secondary data. The fourth chapter contains withincase analysis of the case companies: Gazprom Neft and Lukoil, generalization and analysis of the
interviews, conclusions. The fifth chapter contains conclusions of the research paper, managerial
implications and suggestions for future researchers. This master thesis will be relevant in terms of
practical and theoretical application to analysis of feasibility of the internationalization process of
9
Russian oil companies with focus on supply chain and logistical factors which influence the decisionmaking process about future internationalization. This thesis will provide companies with practical
analysis and future researchers with the theoretical contribution for the potential expansion of the
theory.
Further research is required on a bigger list of companies, both Russian and international in
order to understand the world tendencies in this sphere, moreover more logistical and supply chain
factors should be identified in order to have a possibility to run a Factor analysis and understand which
factors are more significant and which are less significant.
Although there is no general agreement on how to define and evaluate the supply chain and
logistical factors, specifically in oil industry, so, the area has tremendous potential for researchers
providing opportunities for modelling and application of flexibility and evaluation of the supply chain
factors, interrelationships and trade-offs between different types of flexibilities, industry-specific or
business function-specific impact of supply chain factors, and potential barriers to the implementation
of the identified factors.
Limitations of this research can be connected to the 4th part of this research, where the main
logistical and supply chain factors where identified. While searching for the quantitave information
and data to analyze the current situation of the case companies there were very small of relevant and
trustful sources.
In order to validate the identified factors author had to create a theoretical framework while the
Factor analysis would be more useful in this particular research. The Factor Analysis is impossible to
run because the sample size should be large enough to yield reliable estimates of correlations among
the variables: Ideally, there should be a large ratio of N / k (Cases / Items) e.g., > ~20.
order to understand the world tendencies in this sphere, moreover more logistical and supply chain
factors should be identified in order to have a possibility to run a Factor analysis and understand which
factors are more significant and which are less significant.
Although there is no general agreement on how to define and evaluate the supply chain and
logistical factors, specifically in oil industry, so, the area has tremendous potential for researchers
providing opportunities for modelling and application of flexibility and evaluation of the supply chain
factors, interrelationships and trade-offs between different types of flexibilities, industry-specific or
business function-specific impact of supply chain factors, and potential barriers to the implementation
of the identified factors.
Limitations of this research can be connected to the 4th part of this research, where the main
logistical and supply chain factors where identified. While searching for the quantitave information
and data to analyze the current situation of the case companies there were very small of relevant and
trustful sources.
In order to validate the identified factors author had to create a theoretical framework while the
Factor analysis would be more useful in this particular research. The Factor Analysis is impossible to
run because the sample size should be large enough to yield reliable estimates of correlations among
the variables: Ideally, there should be a large ratio of N / k (Cases / Items) e.g., > ~20.
